7-50 Cost Allocation; Equal Gross Margin Percentage; New Method Ted Brown is the chief financial officer of Haywood Inc., a large manufacturer of cosmetics and other personal care products. Ted is conducting a financial analysis of the firm’s line of hand lotions which consists of three prod- ucts: SkinSalve, SkinCream, and SkinBalm. Total sales for the three products in the recent year were $400,000, $250,000 and $500,000, respectively. Because there is a small amount of additional processing cost for each of the three products, which differs between the products ($20,000, $50,000 and $30,000, respectively), Ted has been using the net realizable value method for allocating the joint production cost of $500,000. However, he is not satisfied with the result of somewhat different gross margin percentage ratios (gross margin/sales) for the three products when using this approach. He knows only of the physical units method, the sales value at split-off method, and the net realizable value method for allocating joint cost.

Required Devise a new method of cost allocation for Ted so that after allocation of joint costs and separa- ble costs, the gross margin percentage is the same for all three products.

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